General Principles of Taxation - Lecture Notes PDF

CLWTAXN GENERAL PRINCIPLES OF TAXATION - PART ONE TAXATION — the power by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. — it is merely a way or apportioning the cost of government among those who in some measure are privileged to enjo...

CLWTAXN GENERAL PRINCIPLES OF TAXATION - PART ONE TAXATION — the power by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. — it is merely a way or apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. NATIONAL INTERNAL REVENUE TAXES Income Tax tax on the net income or the entire income received realized in one taxable year tax on the right of the deceased to transmit his estate to his lawful heirs or beneficiaries and certain Estate Tax transfer by the decedent during his lifetime which are made by law the equivalent of testamentary dispositions tax imposed on gift or transfer without consideration of property betweeen 2 or more persons who Donor's Tax are living at the time the transfer is made tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services Value-added Tax in the Philippines and on importation of goods into the Philippines tax measured by certain percentage of the gross selling price or gross value in money of goods sold Percentage Tax barter, exchanged, or imported, or gross receipts or earning derived by person engaged in sale of services. tax imposed on certain specified goods or articles manufactured or produced in the Philippines for domestic Excise Tax sale or consumption or for any other disposition and to things imported into the Philippines. tax on documents, instruments, papers evidencing the acceptance, assignment, sale or transfer on an Documentary Stamp Tax obligation, rights or property incident thereto. THEORIES ON TAXATION Necessity Theory The existence of government is a necessity. It cannot continue without the means to pay its expenses and for (Existence of Government) these means it has the right to compel all its citizens and property within its limits to contribute. Benefits-Received Principle (Reciprocal duties of In return for his contribution, the taxpayer receives the general advantages and protection which the protection and support between government affords the taxpayer and his property. the state and inhabitants) Doctrine of The supreme court described as taxation as a symbiotic relationship whereby in exchange for the protection Symbiotic Relationship that the citizens get from the government, taxes are paid. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with Lifeblood Theory which the state effects its functions for the welfare of its constituents. Since taxes are the lifeblood of the government, they should be collected without unnecessary hindrance. NATURE OF POWER TAXATION —It is inherent in sovereignity. No need for any constitutional grant before a state may exercise power of taxation. Constitutional provisions relating to taxation do not operate as constitutional grant, but merely constitute limitations upon a power which would otherwise be practically without limit. —It is legislative in character. Primarily vested in congress. For local legislative bodies, they can exercise by virtue of a constitutional grant (Section 5, Article X, Constitution) and a law (Local Government Code or Rep. Act No. 7610) —It is subject to inherent and constitutional limitations. Inherent limitations—those which spring from the nature of the taxing power itself. Constitutional limitations—those specifically provided in the constitution or implied therefrom. —In short, a state naturally possesses the authority to impose taxes simply by being a sovereign entity. However, while the state has this inherent power, limitations are applied to ensure that taxation is exercised fairly and reasonably—Inherent limitations: Restrictions that naturally come with the taxing power to prevent excessive or unfair taxes., Constitutional limitations: Specific rules in the constitution that regulate how taxes are imposed to ensure fairness and protect rights. ASPECTS OF TAXATION Levying or Imposition of Tax (Leislative act) Assessment and Collection (Administrative in character) Payment (Taxpayer's compliance with tax laws) Refund (Taxpayer's availment of remedy in case of overpayment) EXTENT OF LEGISLATIVE TAXING POWER Subjects or objects to be taxed (persons, properties, and privileges) Purpose or object of the tax should be used for public purpose Amount or rate of the tax Kind of tax to be collected Apportionment of the tax Situs of taxation (location where tax is imposed) Manner, means and agencies of collection of the tax PURPOSE OF TAXATION REVENUE —The primary purpose is to generate funds for the state to finance the needs of the citizens and to advance the common wealth NON-REVENUE OR OBJECTIVE Regulation Taxes maybe imposed for a regulatory purpose Protectionism Taxes on imports may be increased to protect local industries against foreign competition Reduction of Social Inequality Taxes may be levied to reduce inequalities in wealth and incomes Promotion of General Welfare Taxes may be used as an implement of police power Encourage Economic Growth Tax provisions may provide incentives to encourage investments in productive assets or facilities Taxation can strengthen anemic enterprises or provide incentive to greated production through tax exemption Others Taxes on imported goods may be used as a bargaining tool. Taxes may be increased to halt inflation or lowered to ward off depression BASIC PRINCIPLES OF A SOUND TAX SYSTEM Fiscal Adequacy Sources of revenue should be sfficient to meet the demands of public expenditure Equality or Theoretical Tax burden should be in proportion to the tax payer's ability to pay. Justice (Ability-To-Pay principle) Administrative Feasibility Tax laws should be capable of convenient, just and effective administration. TAXES enforced proportional and pecuniary contributions from persons and propery levied by the law-making body of the state having jurisdiction over the subject of the burden for the support of the government and all public needs ESSENTIAL CHARACTERISTICS OF TAX It is an enforced contribution It is proportionate in character It is generally payable in money It is levied on persons or property It is levied by the state which has jurisdiction over the person or property It is levied by the law-making body of the state It is levied for public purposes It is commonly required to be paid at regular periods or intervals CLASSIFICATION OF TAXES As to subject matter or object Personal, Poll, or Capitation Tax of a fixed amount imposed on persons residing within a specified territory (e.g. community tax) Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance Property with some other reasonable methods of apportionment (e.g. real property tax) Charge imposed upon performance of an act, the enjoyment of a privilege, or the engaging in an Excise occupation (e.g. income tax, estate tax, donor's tax, VAT) As to who bears the burden Tax which is demanded from the person who also shoulders the burden of the tax (e.g. Income tax, Direct donor's tax, property tax, wealth tax) Tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the Indirect expense of another, falling finally upon the ultimate purchaser or consumer (e.g. VAT, sales tax, excise tax) As to determination of amount Tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement. Specific (e.g. excise tax on cigarettes) Tax of a fixed proportion of the value of the property with respect to which the tax is assessed Ad valorem (e.g. real property tax, excise tax on motor vehicles) As to purpose General, Fiscal or Revenue Tax imposed for general purposes of government Special or Regulatory Tax imposed for special purpose (e.g. protective tariffs or custom duties) As to Scope National Tax imposed by the national government (e.g. NIR taxes) Municipal/Local Tax imposed by municipal corporation or local government units (e.g. community tax, professional tax) As to graduation or rate Tax based on a fixed percentage of the amount of the property, receipts or other basis to be taxed Proportional (e.g. VAT, percentage tax) Progressive/Graduated Tax of the rate of which increases as the tax base or bracket increases (e.g. income tax) Regressive Tax the rate of which decreases as the tax base or bracket increases As ability to pay Progressive according to one's ability to pay (e.g. income tax) Regressive opposite of progressive tax (e.g. VAT) FUNDAMENTAL OR INHERENT POWERS OF THE STATE The power of the state or those to whom the power has been delegated tot ake private property for public use Power of Eminent Domain upon payment of just compensation. The power of the state to enact such laws in relation to persons and property as may promote public health, Police Power morals, safety and the general prosperity and welfare of its inhabitants SIMILARITIES AMONG THE THREE POWERS OF THE STATE TAXATION POWER OF EMINENT DOMAIN POLICE POWER Exercise of power of eminent domain may be exercised only by the may be exercised only by the As to exercising authority may be granted to public service government or its political subdivision government or its political subdivision companies or public utilities In police power, the use of property is In taxation, property is taken for the In eminent domain, the property is As to purpose regulated for the purpose of promoting support of government taken for public use or benefit the general welfare Taxation and police power operate Eminent Domain operates on an Taxation and police power operate As to person/s affected upon a community or class of entities entity or individual as the owner of upon a community or class of entities or individuals. a particular property or individuals. In taxation, the money in the concept In eminent domain, there is a transfer In police power, there is no As to effect of taxes becomes part of the public of the right whether ownership or a transfer of title funds lesser right In police power, the person receives In taxation it is assumed the person no direct and immediate benefit but In eminent domain, the person affected affected receives the equivalent of the only such as may arise from As to benefits received receives the market value of the tax in the form of protection and maintenance of a healthy economic property taken benefits received from the government standard of society (damnum absque injuria or damage without injury) In police power, the amount imposed should not be more than sufficient to As to amount In taxation, there is generally no In eminent domain, there is no cover the cost of the license and of imposition limit on the tax that may be imposed amount imposed necessary expenses of police surveillance and inspection, examination or regulation The taxing power is subject to certain As to relationship cosntitutional limitations including the Eminent Domain is inferior to the Police power is relatively free from to the constitution prohibition against the impairment of impairment prohibition constitutional limitations and is the obligation of contracts superior to impairement provisions — They all rest upon necessity because there can be no effective government without them. — They all underlie and exist independenly of the constitution — They are ways by which the state interferes with private rights and property — They are legislative in nature and character — They all presuppose an equivalent compensation received, directly or indirectly, by the person affected by the exercise of these powers by the government IN SHORT, Taxation raises funds for government activities. Eminent Domain allows property acquisition for public use. Police Power regulates for public safety and welfare. 9/10/2024 LECTURE NOTES Documentary Stamp tax is an excise/privilege tax Excise Tax = Privilege tax = Sin tax (according to subject matter) cigarettes, etc. Basic Principles of a Sound Tax system (slide 18) 1. Fisqual Adequacy = Balanced Budget (consequence: deficit) Tax = rate x base If government wants to have higher collection, increase rate or base (taxable amount) Real property is based on value of base, (e.g. value of property must be adjusted every 3 years, appreciate market value) Revoke tax exemption If there is a surplus, do reverse 2. Theoretical Justice Higher income = higher tax 3. Administrative Feasibility (e.g. # of pages to fill in for income tax return, mode of payments when paying tax, when and where to file tax, witholding tax system = if u are an employee, you will receive ur salary with taxes deducted, since employer will file it = tax liability) Question #3 = taxation is only void if it is against the constitution Taxes taxes are not based on contract, because it is an enforced contirbution income tax is annuall, but paid via installments (partial) quarter , VAT = quarterly CLASSIFICATION OF TAX basic community tax is 5 pesos, regardless of employment status community tax certificate income tax - liability and burden - income earner, also in donor tax capital gain tax = can the buyer shoulder the capital gain tax? yes but it not by law, but BIR will always run after the seller income tax = national tax VAT = national tax Customs duty =national tax property tax = local professional tax = local why is VAT regressive? because whether u are rich or poor, u absorb the same amount of VAT according to supereme court, there is no prohibition in the law that you cannot impose regressive tax which is better in the PH? Direct tax special asssessment is only for properties/land if property is exempted from real property tax, it is also exempted from special assessment, but by LAW legal rate of interest in the PH = 6% if u are going to practice a profession, you have to pay license fee regulation does not include prohibition when do u pay license fee? before u engage in business tax - when engaging in business no license fee= EMINENT DOMAIN Can you be forced by government to sell a property for public use? - government will make an offer first to buy property, then consent - if you dont wanna sell the property, government is allowed to exercise eminent domain (act of taking property = expropriation) - JUST compensation = market value of property - Eminent Domain is superior in books, as you can be forced by the government to sell your property CLWTAXN GENERAL PRINCIPLES OF TAXATION - PART TWO LIMITATIONS ON POWER OF TAXATION The power of taxation is NOT absolute. It is subject to certain limitations or restrictions. INHERENT LIMITATIONS those which spring from the nature of the taxing power itself although they may or may not be provided in the Constitution. 1 Public purpose 2 Non-Delegation of taxing power 3 Exemption of the government 4 Territoriality/Situs 5 International Comity Public Purpose Purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals No longer confined to the traditional notion of use by the public but held synonymously with public but held syynonymously with public interest, public benefit, public welfare and public convenience Reasons A tax levied for a private, not public purpose constitutes a taking of property without due process of law as it is beyond the power of the government to impose. Public funds can only be spent for public purpose. Case Question The government uses funds to build houses for the poor. Is this considered a public purpose? Q: Yes or No and Why? Building houses for the poor is still considered a public purpose as it improves the safety A: and welfare of the citizens in an indirect manner. Instances of Public Purpose Financing of educational activities and programs Promotion of science Building and maintenance of hospitals, roads, bridge and piers Aid for victims of a public calamity Relief for the poor and the unemployed and to provide for unemployment benefits Payment of pensions and bonuses for services rendered by public officers or employees. Effect of Incidental Benefit to private interest Still for public purpose The test is not as to who receives the money, but the character of the purpose for which it is expended Taxpayer's Suit A case where the law or act of complained of directly involves the illegal disbursement of public funds derived from taxation Case Question Q: As a taxpayer, can I file a case questioning the legality of a law? A: Yes, only if the law involves the illegal disbursement or appropriation of public funds. Non-delegation of Taxing Power Principle of Separation of Powers ordains that each of the 3 great branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere Case Question Q: Can the legislative power be delegated? Potestas Delegata Non Delegari Potest—What has been delegated cannot be delegated. A: The people of the Philippines can delegate legislative powers to the congress, but the congress cannot delegate the power to other people or institutions. Exceptions (1) Delegation of TARIFF powers to the president under section 28 (2) of Article VI of the Constitution which reads: "The Congress may, by law, authorize the president to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government (2) Delegation to local governments: Justified by necessary implication that the power to create political corporations carries with it the power to confer on such local government agencies the authority to tax Presently, local government units can exercise taxing power pursuant to a direct constitutional grant: Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. (Section 5, Article X, 1987 Constitution); and by virtue of a law – Republic Act No. 7160 or The Local Government Code (3) Delegation to administrative bodies Delegable powers Power to value property for taxation purposes pursuant to fixed rules Power to assess and collect the taxes Power to perform any of the innumerable details of computation, appraisement, and adjustment, and the delegation of such details Exemption of the Government from Taxes Reason To levy a tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, government would be taxing itself to raise money to pay over to itself. Not withstanding the immunity of the government from Taxes, the principle is also well recognized that the government may tax itself as there is no constitutional prohibition against the government taxing itself. (1) Governmental or Sovereign Functions Those pertaining to the administration of government and are treated as absolute obligation on the part of the state to perform General Rule: Tax-exempt Exception: Taxable by law (2) Proprietary Functions Those that are undertaken only by way of advancing the general interest of society and merely optional General Rule: Taxable Exception: Tax-Exempt by law NOTE If the law is silent, it is taxable. Unless stipulated by law. Limitation of Territorial Jurisdiction (1) Territoriality/Situs or Place of Taxation A state may not tax property lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from laws of another state and therein exercised and enjoyed Protection is a basic consideration that justifies the situs of taxation Exception: A person may be taxed where there is between him and the taxing state, a privity of relationship justifying the levy. In this case, the basis of the power to tax is dependent upon his relation as a citizen to the state. (2) International Comity Courteous and friendly agreement and interaction between nations A property of a foreign state may not be taxed by another Grounds: Sovereign Equality Among States - one state cannot exercise its sovereign powers over another Usage Among State - when a state enters the territory of another state, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the latter Foreign Government may not be sued without its consent Constitution A written instrument by which the fundamental powers of government are established, limited and defined and by which these powers are distributed among the several departments (like executive, judicial and legislative departments) for their safe and useful exercise for the benefit of the body politic) The basic law to which all other lawsm whether domestic or international, must conform When the courts declared a law to be inconsistent with the constitution, the former shall be VOID and the latter shall govern. Administrative or executive acts, orders and regulations shall be valid only when they are not contrary to the laws or the constitution (Article 7, Civil Code of the Philippines) A legislative or executive act that is declared void for being unconstitutional generally cannot give any rise to any right or obligation 1987 Constitution - Current constitution ratified by the people through a plebiscite on February 2, 1987 GENERAL OR INDIRECT CONSTITUTIONAL LIMITATIONS 1 Due process clause 2 Equal protection clause 3 Freedom of the press 4 Religous freedom 5 Non-impairment clause Due Process Clause Basis: "No person shall be deprived of life, liberty, or property without due process of law, x x x." [Sec. I, Article III, (Bill of Rights), 1987 Constitution] Due Process does not have a precise definition, its essence is that it is an opportunity to be heard or hear the other side of the argument before making a judgement 2 Aspects of Due Process Substantive due process - refers to the intrinsic validity of law that interferes with the rights of a person 1 to his property or deprivation must be under the authority of law that is valid or of the Constitution itself. 2 Procedural due process - after compliance with fair and reasonable methods of procedure prescribed by law. e.g. Due Process Requirement in the Issuance of a Deficiency Tax Assessment; Assessment without Pre-Assessment Notice is null and void (READ: Commissioner vs. Metro Star Superma, Inc. G.R. No. 185371, December 8, 2010) Equal Protection Clause Basis: "X x x, nor shall any person be denied the equal protection of the laws." [Sec.I, Article III, (Bill of Rights), 1987 Constitution] Meaning—All persons subject to legislation shall be treated alike under like circumstances and conditions in both in privileges conferred and liabilities imposed. It does not demand absolute equality Equal treatment neither requires universal application of laws to all persons without distinction, nor intends to prohibit legislation by limiting the object to which it is directed or by the territory in which it is to operate. Requisites of a Valid Classification under Equal Protection Clause To be VALID, classification must: 1 Rest on substantial distinctions; 2 Germane to the purpose of the law; 3 Not limited to existing conditions only; and 4 Apply equally to all members of the same class (READ: ORMOC SUGAR COMPANY, INC., vs. THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY, G.R. No. L-23794, February 17, 1968) Freedom of the Press  Basis: "No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peacably to assemble and petition the government for redress of grievances. [ Sec. 4, Article III, (Bill of Rights), 1987 Consitutiton] Religous Freedom Basis: "No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religous profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. [Sec. 5, Article III, (Bill of Rights), 1987 Constitution] Imposition of License Fee Unconsitutional because it is actually in the nature of a condition or permit for the exercise of the right or lays a prior restraint on the said right. Imposition of Tax Consitutional as it is imposed purely for revenue purposes. Non-Impairment Clause Basis: "No law impairing the obligation of contracts shall be passed. [Sec.10, Article III, (Bill of Rights), 1987 Constitution] Meaning of Impairment of Obligation of Contract The obligation of a contract is impaired when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter. Application: If contract is changed or revoked by law—unconstitutional. If franchise is revoked by law—constitutional as a franchise is subject to amendment, alteration or repeal" by Congress (Sec.II, Article XII, 1987 Constitution) SPECIFIC OR DIRECT CONSTITUTIONAL LIMITATIONS Taxation shall be uniform and equitable Progressive system of taxation Non-imprisonment for non-payment of poll tax Origin of revenue or tariff bills Delegated authority of the president to impose tariff rates, import and export quotas, tonnage and wharfage dues Tax exemption of religous, charitable and educational entities Grant of authority to local government units Tax exemption granted to non-stock non-profit educational institutions Voting requirement with respect to tax exemption Power of the president to veto any particular item or items in a revenue or tariff bills Non-impairment of jurisdiction of the supreme court in tax cases Non-appropriation of public funds for religous purposes Taxation shall be uniform and equitable Basis: "The rule of taxation shall be uniform and equitable. XXX. [Sec. 28 (I). Article VI, Legislative Department), 1987 Constitution] Meaning of Uniformity in Taxation All taxable articles or properties of the same class shall be taxed the same rate. The rule requires the uniform application and operation, without discrimination, of the tax in every place where the subject of it is found. Uniformity implies equality in burden, not equality in amount. (READ: Sison, Jr. vs Ancheta, G.R. No. L-5941, July 25, 2984) It requires that the approtionment of tax burden be more or less just in the light of the taxpayer's ability to shoulder the tax burden (in terms of property, wealth and income) Its cornerstone is the ability to pay. Progressive system of Taxation Basis: "Xxx. The Congress shall evolve a progressive system of taxation. [sec. 28 (I), Article VI, (Legislative Department), 1987 Constitution] Interpretation: Direct taxes are to be preferred and as much as possible, indirect taxes should be minimized. Non-imprisonment for Non-payment of poll tax Basis: "No person shall be imprisoned for debt or non-payment of a poll tax. [Sec. 20, Article III, (Bill of Rights), 1987 Constitution] Application: It applies only to poll tax or tax of a fixed amount imposed on persons residing a specified territory, whether citizens or not, without regard to their property, occupation or business. An example of a poll tax is community tax. Imposition of surcharge in the form of interest is allowed. The interest is 2% per month or 24% per annum. In case of falsification of community tax certificate, penalty of imprisonment may be imposed. Origin of Revenue/Tariff Bills Basis: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the house of representatives, but the senate may propose or concur with ammendments." [Sec.24, Article VI, (Legislative Department) 1987 Constitution] General Rule: If it is an ordinary bill, it may originate either in the house of representatives or the senate Exception: Sec. 24, Article VI, (Legislative Department), 1987 Constitution Tax Exemption of Religous, Charitable, and Educational Entities Basis: "Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religous, charitable, or educational purposes shall be exempt from taxation." [Sec. 28 (3), Article VI, (Legislative Department), 1987 Constitution] Application: Coverage - Property tax only (real property tax) Test of exemption - Use of property and not ownership Nature of use - the real property must be actually, directly and exclusively used for religous, charitable or educational purposes. Solely is synonymous with exclusively. The exemption also applies to incidental use. (e.g. a vegetable garden adjacent to a convent) Tax Exemption granted to Non-Stock Non-Profit Educational Institutions Basis: "All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law." [Sec. 4 (3), Article XIV, (Legislative Department), 1987 Constitution] (Read: Commissioner vs. DLSU, G.R. No. 196596, November 9, 2016) It is a non-stock non-profit educational institution Income, whether from educational activities or not, is used actually, directly, and exclusively for educational purposes Proprietary Educational Institutions - subject to 1% based on net income tax. If the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by such educational institutions, the 20%/25% income tax shall be imposed on their taxable income. Grant of Authority to Local Government Units Basis: "Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the congress may provide, consistent with the basic policy of autonomy. Such taxes, fees, and charges shall accrue exclsively to the local governments. [Sec. 5, Article X, (Legislative Department), 1987 Constitution] Voting Requirement with respect to Tax Exemption Basis: "No law granting any exemption shall be passed without the concurrence of a majority of all the Members of the Congress. [Sec. 28 (4), Article XIV, (Legislative Department), 1987 Constitution] Application: General Rule: Relative majority is required (Majority of those present provided there is a quorum) Exception: Tax Exemption - Absolute majority or majority of all members of congress Power of the President to Veto any particular item or items in revenue or tax bills Basis:"The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object. [Sec. 27 (2), Article VI, (Legislative Department), 1987 Constitution] Application: General Rule: If the president exercises his veto power; the entire bill is rejected. Exception: Item veto is allowed in appropriation, revenue or tariff bill. Non-Impairment of Jursidiction of Supereme Court in Tax Cases Basis: "The Congress shall have the power to define, prescribe and apportion the jurisdiction of the various courts but may not deprive the Supreme court of its jurisdiction over cases enumerated in Section 5 hereof. [Sec. 2, Article VIII, (Judicial Department), 1987 Constitution] The Supreme court has the following powers: Review, revise, reverse, modify or affirm on appeal or certiorari as the law or the rules of court may provide, final judgements and orders of lower courts in: All cases involving the legality of any tax, impost, assessment or toll or any penalty imposed in relation thereto. [Sec. 5 (2b), Article VIII, (Judicial Department), 1987 Constitution] Non-Appropriation of Public Funds for the Benfit of any church, sect or system of Religion Basis: General Rule: "No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religous teacher, or dignitary as such. Exception: Except when such priest, preacher, ministary, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium. [Sec. 29 (2), Article VI, (Legislative Department), 1987 Constitution] CLWTAXN GENERAL PRINCIPLES OF TAXATION - PART THREE MEANS EMPLOYED TO AVOID OR MINIMIZE THE HARSH EFFECTS OF DOUBLE TAXATION Tax Credit amount that can be deducted from tax due in order to get the tax still due or payable. (e.g. foreign income tax paid may be claimed as a tax credit against Philippine income tax due) Tax Deduction amount that can be subtracted from gross income in order to arrive at taxable income (e.g. foreign income tax paid may be claimed as a tax deduction instead of tax credit) Tax Exemption Immunity from taxation to which others are subjected (e.g. under the tax code, income earned from outside the Philippines by a non-resident citizen is not subject to Philippine income tax) Tax treaty with other states Entered into to reconcile the national fiscal legislations of the contracting parties and in turn help the taxpayer avoid simultaneous taxations in two different jurisdictions (international double taxation) Treaty must be ratified by the senate—two-thirds vote ILLUSTRATION The domestic corporation had the following data for Foreign Income If Foreign Income If Foreign Income Tax not claimed Tax is claimed as Tax is claimed as as Tax Credit or Tax Deduction Tax Credit Deduction Gross Income 30,000,000 30,000,000 30,000,000 Less: Deductions 10,000,000 10,000,000 10,000,000 Foreign Income tax 0 1,750,000 0 Taxable Income 20,000,000 18,250,000 20,000,000 Philippine Income Tax Due at 25% 5,000,000 4,562,500 5,000,000 Less: Tax Credit (Foreign 0 0 1,750,000 Income Tax) Philippine Income Tax Still 5,000,000 4,562,500 3,250,000 Due or Payable Taxpayer may choose from either tax credit or tax deduction. FORMS OF ESCAPE FROM TAXATION No loss of revenue to government Shifting Capitalization Transformation Resulting in loss of revenue Evasion (illegal) Avoidance (legal) Exemption No Loss of Revenue to Government A. SHIFTING the transfer of tax burden by the statutory taxpayer (the one liable under the law) (impact of taxation) to another or someone else (incidence of taxation) BUYER absorbs tax. Seller is liabile for the tax. FORWARD SHIFTING When tax burden is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer (e.g. from retailer to consumer, the gross selling price of the goods is PHP100,000. The buyer who absorbs the VAT will pay PHP112,000 since the VAT is PHP12,000) BACKWARD SHIFTING When tax burden is transferred from consumer through factors of distribution to the factors of production. (e.g. from consumer to retailer, the amount to be paid by the buyer is just PHP100,000 and not PHP112,000. In this case, the retailer absorbs the VAT which is PHP10,714.29 (PHP100,000/1.12x12%) Seller is liable for the VAT. ONWARD SHIFTING When the tax is shifted two or more times either forward or backward (e.g. from manufacturer to retailer to ultimate consumer.) FORMULA FOR FINDING VAT AMOUNT FROM VAT EXCLUSIVE AMOUNT Tax-Exclusive Amount / 1.12 x 12% B. CAPITALIZATION A reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay. (e.g. the selling price of the real property is PHP1,000,000 and the real property tax thereon for five years is PHP50,000. If the buyer pays PHP950,000 only, the seller in effect shoulders the real property tax burden of the buyer.) Buyer is liable of the VAT. C. TRANSFORMATION Manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add tax to the price, pays the tax and endeavours to recoup himself by improving his process of production, thereby turning out his units at a lower cost. ILLUSTRATION Reduced Sales Reduced Profit Transformation Selling Price 850 850 850 Add'l Selling Price Representing 150 0 0 Excise Tax passed on to buyer Cost of Production (600) (600) (450) Excise Tax (150) (150) (150) Profit 250 100 250 Manufacturer is liable for the tax. Manufacturer/Seller absorbs the tax. Resulting in loss of revenue A. TAX EVASION the use by the taxpayer of illegal means to defeat or lessen the payment of tax. Factors in Tax Evasion The end to be acheived. An accompanying state of mind which is evil, in bad faith, willful or deliberate and not accidental. A course of action or failure of action which is unlawful. example: Substantial Underdeclaration of sales, receipts or income or substantial overstatement of deductions Substantial underdeclaration or overstatement more than 30% of the declared or reported sales, receipts or income more than 30% of the actual deductions If it's not more than 30%, there is no fraud. B. TAX AVOIDANCE the use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability example: interest dervied from bank deposit If savings deposit, the interest is subject to 20% final tax If time deposit with maturity of not less than 5 years - tax-exempt sales of shares of stock in a domestic corporation thru the stock exchange - subject to stock transaction of tax of 6/10 of 1% of the gross selling price not thru stock exchange - subject to capital gains tax of 15% on the capital gain CAPITAL GAINS TAX vs. STOCK TRANSACTION TAX (TAX AVOIDANCE) All individuals All individuals and DC and DC Selling Price 2,000,000 6,000,000 Cost 1,500,000 (7,000,000) Capital Gain (Loss) 500,000 1,000,000 Better option, the tax Capital Gains Tax (if sold not payer will have a tax 75,000 0 thru the stock exchange) savings of PHP36,000 better option, the tax Stock Transaction Tax (if thru payer will have a tax 12,000 36,000 stock exchange) savings of PHP63,000 DISTINCTIONS b/w TAX EVASION AND TAX AVOIDANCE As to Validity Tax evasion is illegal and subject to criminal penalty Tax avoidance is legal and thus not subject to criminal penalty As to Effect Tax evasion results in absence of taxation Tax avoidance results in tax minimization C. TAX EXEMPTION grant of immunity to particular persons or corporations from tax persons and corporations generally within the same state or taxing district are obliged to pay. (e.g. Exemptions under the Constitution, Tax Code and Special laws NATURE OF POWER TO GRANT EXEMPTION National Government - Inherent as power to tax implies the power to prescribe who or what shall not be taxed. Local Government - don’t have the inherent power to exempt from taxation GROUNDS FOR TAX EXEMPTION Based on Contract – government is supposed to receive a full equivalent therefor. Based on Some Ground of Public Policy – gov’t need not receive any consideration in return for the tax exemption. Created in a Treaty on Grounds of Reciprocity – to lessen the rigors of international double or multiple exemption. NATURE FOR TAX EXEMPTION It is a mere personal privilege of the grantee. It is generally revocable by the government unless the exemption is founded on a contract. It implies a waiver on the part of the Government of its right to collect. Hence, it exists only by virtue of an express grant and must be strictly construed. (meaning, you're not exempted) It is not necessary discriminatory so long as the exemption has a reasonable foundation or rational basis. Exemption under the Tax Code From Income Tax - Income derived from tax-exempt activity by non-stock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes. (BUT, income from property or from any activity conducted for profit, regardless of dispotion, is subject to income tax) From Income Tax - minimum wage, overtime pay, holiday pay, night-shift differential and hazard pay received by a minimum wage earner. From VAT - monthly rent of residential unit not exceeding PHP15,000 From VAT - sale or importation of agricultural and marine food products in the original state. (e.g. vegetables, preserved fish) Processed food = VATABLE (if they don't have dining area, tax-exempt) Exemption under SPECIAL LAWS From Income Tax - Income from operations of Barangay Micro Business Enterprises (BMBE) (RA No. 9178) but subject to other taxes. BMBE—business enterprise engaged in the production, processing or manufacturing of products, including processing, as well as trading and services, with total assets of not more than PHP3 million. Such assets shall include those arising from loans but not the land on which the plant and equipment are located. The term "services" shall exclude those rendered by ay one, who id duly licensed by the government after having passed a government licensure examination. From Income Tax - benefit payments to members by GSIS (PD No. 1146) and SSS (RA. No.1161 as amended) TAX AMNESTY It is a general pardon or intentional overlooking by the state of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of revenue or tax law. It partakes an absolute forgivenes or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. e.g. Estate Tax Amnesty until June 14, 2021 now until 2023—net estate of the deceased who died prior to January 1, 2018 subject to 6% amnesty rate without surcharge, interest and penalty. If will not avail of the amnesty, the net estate is subject to 0%-20% estate tax, plus surcharge, interest and penalty. Differences between Tax Exemption and Tax Amnesty In tax amnesty, the taxpayer is immune from civil, criminal and administrative liabilities, while in tax exemption, the taxpayer is immune from civil liability only. Tax amnesty applies to prior tax periods or retroactively, while tax exemption applied prospectively. TAX LAWS NATURE Not Political in Nature Deemed to be the laws of the occupied territory and not of the occupying enemy. (e.g. Philippine tax laws continued in force during the period of Japanese occupation and were actually enforced by the occupation government) Civil in Nature Not penal, although penalties are provided for their violation. The purpose in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty. TAX LAWS CONSTRUCTION Legislative Intention Must be Considered Tax laws are received to a reasonable construction or interpretation with a view to carrying out their purpose and intent. Should not be constructed as to permit the taxpayer easily to evade the payment of tax. Thus, good faith is not a valid defense to justify non-payment of tax or surcharge. Where there is No Doubt Where the language of tax stature is plain and there is no doubt as to the legislative intent, the words are to be given their ordinary meaning When there is Doubt Tax statutes are construed strictly against the government and liberally in favor of the taxpayer as taxes are not to be presumed beyond what the statute expressly and clearly declares. (READ: Lincoln Philippine Life Insurance Company, Inc. vs. Court of Appeals, G.R. No. 118043, July 23, 1998) In case of tax exemptions and refunds, they are construed strictly against the person claiming exemption or refund and liberally in favor of the government. The reason is that taxation is the rule, and exemption is the exception Exceptions: When the law itself expressly provides for a liberal construction—In case of doubt, it shall be resolved in favor of exemption When the exemption is in favor of the government itself, or its agencies, or of religious, charitable and education institutions. Where there is Conflict with Other Laws National Internal Revenue Code, being a special law, it prevails over a general law like the Civil Code of the Philippines TAX LAWS APPLICATION General Rule: Prospective in operation Exception: Retroactive provided it is expressly declared or is clearly the legislative intent. Exception to Exception: Not to be given retroactive application when it would be harsh and opressive, for in such case, the constitutional limitation of due process would be violated. Mandatory Provisions: Intended for the security of the citizens (like those requiring previous notice to taxpayer of public sale of his property for tax delinquency) or which are designed to insure equality of taxation or certainty as to the nature and amount of each person’s tax (Like those prescribing tax rates) Directory Provisions: designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings. Distinction: Omission to follow Mandatory Provisions renders invalid the act or proceeding to which it relates while the omission to follow Directory Provisions do not involve such consequence. TAX LAWS SOURCES Constitution ratified by the people. Tax Codes (National Internal Revenue Code, Tariff and Customs Code and portions of the Local Government Code) enacted by Congress Statutes like RA 1125 as amended (An Act Creating the Court of Tax Appeals), RA 8794 (Law imposing Motor Vehicle User’s Charge), PD No. 118, as amended (Law imposing Travel Tax) enacted by Congress Presidential Decrees issued by the President during martial law Executive Orders issued by the President under the Providional Government and pursuant to the legislative power possessed by the President before the convening of Congress on July 27, 1987 Court decision (forms of the legal system of the Philippines) Revenue regulation promulgated by the Dept. of Finance Administrative issuances of the BIR like Revenue Memorandum Circulars and those of the Bureau of Customs like Customs Memorandum Orders BIR Rulings Local Tax Ordinances enacted by local legislative bodies Tax treaties and conventions with foreign countries entered into for the avoidance of international double taxation. They have the same force and effect as statues Revenue Regulations ssuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the National Internal Revenue Code and related statutes. Nature of Power to make regulations under Section 244 of the Tax Code Legitimately exercised only for the purpose of implementing the law or putting it into effect. The statute which is being administered may not be altered or added to by the exercise of a power to make regulations. Regulations cannot increase or decrease the requirements of the law, nor embrace matter not covered or intended to be covered by the statute, otherwise, they are INVALID for being in conflict with the law. Validity of Regulations Requisites: Necessary to the proper enforcement of law Must not be contract to law and the constitution Must be published in the Official gazette (the Official Publication of the Government) or a newspaper of general circulation) Copies thereof must be filled witht he University of the Philippine Law Center (Office of the National Administrative Register – the official repository of all the implementing rules and regulations) Effectivity 15 days from the date of filing with the UP Law Center unless a different date is fixed by law, or specified in the rule in cases of imminent danger to public health, safety and welfare. Force and Effect of Regulations Have the force and effect of the law Binding as if the regulations had been written in the law itself. In case of conflict with the law or the constitution, administrative rules and regulations are null and void Admnistrative Interpretations and Opinions The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive original jurisdiction of the Commissioner of Internal Revenue subject to review by the Secretary of Finance. (Sec. 4, Tax Code) Regulations formal interpretation of the provision of the tax code and other laws by the secretary of finance upon recommendation of the commissioner of Internal Revenue. Circular or Memorandum issuances that publish pertinent and applicable portions, as well as amplifications of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. Rulings less general interpretations of tax laws at the administrative level issued by tax officials in performance of their assessment functions. official position of the BIR to queries raised by the taxpayers and other stakeholders relative to clarification and interpretation of tax laws Opinions of Secretary of Justice Rulings in the form of opinions on tax questions given by the Secretary of Justice who is the chief legal officer of the government. Weight Given to Administrative Interpretation Entitled to great respect by court. But, NOT conclusive and binding upon the courts and will be ignored if judicially found to be erroneous. Power of Secretary of Finance to Revoke Rulings of Predecessor Rulings of predecessors are not binding upon the Secretary of Finance and if thereafter the Secretary becomes satisfied that a different construction should be given. Non-retroactivity of Repeal Regulations or Rulings General Rule: Not given retroactive application when such revocation, modification or reversal will be prejudicial to the taxpayer. (PROSPECTIVE) Exceptions (RETROACTIVE): When taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR Where the facts subsequently gathered by the BIR are materially different from facts on which the ruling is based. Where the taxpayer acted in bad faith Decisions of Supreme Court and Court of Tax Appeals Binding on all subordinate courts and have the force and effect of a law pursuant to Article 8, Civil code of the Philippines which reads: “Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines.” Decisions of Court of Tax Appeals are appealable to the Supreme Court. CLWTAXN PRINCIPLES OF INCOME TAXATION INTRODUCTION TO INCOME TAX Income All wealth which flows into the taxpayer other than as a mere return of capital A gain derived from capital, from labor or from both combined, including profits gained from dealings in property or as well as any assets clearly realized. Increase in net worth other than from donation and succession/inheritance Return of Capital vs. Return on Income e.g. In 2018, Mr.A bought a land for PHP500,000. In 2019, he sold it for PHP1.2M. Determine the following: (a) Return of Capital and (b) Capital Fund or property used in producing goods and services. Capital vs. Income Capital Fund or property existing at one distinct point of time. Wealth By analogy—tree Income Flow of services rendered by that capital Income Tax Tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on pertinents items of gross income less the deductions if any, XXX Functions of Income Tax To provide large amounts of revenues To offset regressive sales and consumption taxes To mitigate the evils arising from inequalities in the distribution of income and wealth which are deterrents to social progress Nature and Purpose of Income Tax It is an excise or privilege tax It is self-assessing or self-computed It is imposed primarily to raise revenue Requisites of Taxable Income There must be gain or profit The gain must be received (actual or conservative) or realized. Constructive receipt Stopped at Requisites of Taxable Income Requisites of Taxable Income There must be gain or profit The gain must be received (actual or constructive) or realized. Constructive receipt—occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. examples: Bank deposits which are made available to the seller of the services without restrictions Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for the services rendered. The gain must not be excluded or exempt by law or treaty from taxation Systems of Taxation Global Treatement system where the tax treatement views indifferently the tax base and generally treats in common all categories of taxable income without any distinction as to their type or nature and subjects them to a single set of graduated fixed tax rates example: Net compensation income 600,000.00 Net income from business/practice of profession 1,000,000.00 Non-operating income 400,000.00 Tax Computation Net compensation income 600,000.00 Net income from business/practice of profession 1,000,000.00 Non-operating income 400,000.00 Taxable Income 2,000,000.00 Personal Income Tax 402,500.00 Schedular Treatment system employed where the income tax treatment varies and made to depend on the kind or category of the taxable income. example:The taxpayer is an individual with the following data: Royalties from books 200,000.00 Dividends from domestic corporation 100,000.00 Interest derived from peso bank deposit 5,000.00 Tax Computation Tax Rate/s Tax Royalties from books 200,000.00 10% 20,000.00 Dividends from domestic corporation 100,000.00 10% 10,000.00 Interest derived from peso bank deposit 5,000.00 20% 1,000.00 TOTAL 31,000.00 Q: What is the income tax system in the Philippines? A: Philippines—semi-global, semi schedular General Principles of Income Taxation Except when otherwise provided in Tax Code: (1) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (2) A nonresident citizen is taxable only on income derived from source within the Philippines; (3) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. (4) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (5) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (6) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Factors that Determine Situs for Income Tax Citizenship Residence Source of Income TAXABLE PERSONS SOURCE OF INCOME REGULAR INCOME TAX Within the Outside the Tax Base/Taxable INDIVIDUALS Tax Rate/s Philippines Philippines Amount Resident YES YES Net Income 0-%35% Non-resident YES NO Net Income 0-%35% Resident Aliens YES NO Net Income 0-%35% Non-Resident Aliens a) engaged in trade or business YES NO Net Income 0-%35% b) not engaged in trade or business YES NO Gross income 25% (Final Tax) TAXABLE PERSONS SOURCE OF INCOME REGULAR CORP. INCOME TAX Within the Outside the Tax Base/Taxable Tax Rate/s CORPORATIONS Philippines Philippines Amount Domestic Corp. YES YES Net Income 20%/25% Foreign Corp. a) Resident engaged in Business YES NO Net Income 25% b) Non-resident not engaged in Business YES NO Gross Income 25% (Final Tax) Gross Income = Sales - Cost of Sales/Services and add Other Income Net Income = Gross Income - Deductions e.g. The Taxpayer has the following data for taxable year 2023: Within the Outside the Philippines Philippines Gross Income 7,000,000.00 3,000,000.00 Business Expenses 3,000,000.00 1,000,000.00 Non-Business Expenses 2,000,000.00 1,000,000.00  Resident Non-Resident Resident NRA NRA Citizen Citizen Alien Engaged Not Engaged Gross Income 10,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 7,000,000.00 Less: Deductions 4,000,000.00 3,000,000.00 3,000,000.00 3,000,000.00 0.00 Taxable Income 6,000,000.00 4,000,000.00 4,000,000.00 4,000,000.00 7,000,000.00 Regular Income Tax/ Final Income Tax 1,602,500.00 1,002,500.00 1,002,500.00 1,002,500.00 1750000 (FT) Get the excess, multiply it by the rate and add the number REGULAR/NORMAL CORPORATE INCOME TAX Domestic Corporation Rate Effectivity In General 25% July 1, 2020 Corporations with Net Taxable Income not exceeding P5 million and Total Assets not exceeding P100 million, excluding the land on which the particular business entity’s office, plant and equipment are situated. 20% July 1, 2020 Foreign Corporations Rate Effectivity Resident 25% July 1, 2020 Non-resident 25% January 1, 2021 Resident Non-resident Domestic Foreign Foreign Corporation Corporation Corporation Gross Income 10,000,000.00 7,000,000.00 7,000,000.00 Less: Deductions 4,000,000.00 3,000,000.00 0.00 Taxable Income 6,000,000.00 4,000,000.00 7,000,000.00 Regular Income Tax/ Final Income Tax 1,500,000.00 1,000,000.00 1,750,000.00 Classification of Income taxpayers Individuals Citizens Resident citizens Non-resident citizens Aliens Resident aliens Non-resident aliens engaged in trade or business within the Philippines not engaged in trade or business within the Philippines Corporations Domestic Foreign Resident foreign corporation Non-resident foreign corporation Partnership Business Partnerships General Professional Partnerships Estate and Trusts Stopped at Module 4, Slide 40 (Corporation, Tax Code) CLWTAXN PRACTICE QUIZ 1 TRUE OR FALSE NO. QUESTION ANSWER REMARKS Benefits from taxation have to be experienced to justify the legitimacy of collection 1 FALSE Taxation benefits the society as a whole, and not necessarily individual taxpayers. of taxes from the people. Although, toll roads are for public purpose, some toll roads were built by private 2 Toll may be imposed by private entities or individuals. TRUE entities such as SMC. The right of a government to tax is often justified by the need to protect its citizens 3 Protection is the basic consideration that justifies tax situs TRUE and their property. 4 Interpretation of tax laws is done by the legislative branch of governement FALSE Judiciary Taxation is a way of apportioning the cost of government among those who In notes— it is merely a way or apportioning the cost of government among those who 5 TRUE are privileged to enjoy its benefits in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. 7 The power to value property for purposes of taxation is legislative in character. FALSE Judiciary in character. Legislative CREATES laws, Judiciary INTERPRETS laws The government automatically possesses the power to collect taxes from its 8 TRUE It is inherent in sovereignity. inhabitants. The power of taxation may be exercised by the government, its political subdivision, 9 FALSE Government only. and public utilities The state can enforce contributions upon its citizens in the form of taxes even It is inherent in sovereignity. No need for any constitutional grant before a state may 10 TRUE without provision in the constitution authorizing it. exercise power of taxation. The actual effort exerted by the government to effect the exaction of what is due 11 TRUE from the taxpayer is known as collection MULTIPLE CHOICE NO. QUESTION REMARKS 6 Which statement below expresses lifeblood theory? a) The assessed taxes must be enforced by the government Taxation is an arbitary method of exaction by those who are in the seat of power The power of taxation is an inherent power of the sovereign to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues The underlying basis of taxation is government necessity, for without taxation, a government can neither exist nor endure 12 Which of the following is INCORRECT? Any constitutional provision could not restrict taxation Taxation is subject to inherent and constitutional limitations. Taxation exists inseparably with the state Taxation is inherently legislative in nature Taxation could be exercised without specific provisions in the constitution granting it 13 Which one of the following is NOT a nature of the state's power of tax? It is based on the tax payer's ability to pay VAT is not based on one's ability to pay, so it is not a nature of the state's power of tax. It is subject to constitutional and inherent limitations It is legislative in character It is inherent in sovereignity The following are similarities of the inherent power of taxation, eminent domain and 14 police power EXCEPT: Are necessary attributes of sovereignty While taxation and police power generally affect all persons or the public, eminent domain Affect all persons or the public specifically affects certain individuals whose property is targeted, and not all persons are directly impacted by eminent domain actions. Interfere with private rights and property Are legislative in nature 15 A kind of tax system where rate increases as the tax base increases Direct Regressive Proportionate Progressive After the province has constructed a provincial road worth 50 million, congress may impose 16 levy upon lands specifically benefitted by the road up to an amount not to exceed 0% of the actual project cost 100% of the actual project cost 60% of the actual project cost 40% of the actual project cost 17 Although the power of taxation is legislative in character, it is NOT the function of congress to Collect the tax levied under the law BIR, BOC, LGU collects taxes. Determine who should be subject to tax Fix with certainty the amount of taxes Identify who should collect tax 18 Which of the following is not a measure to enhance administrative feasibility of taxation system? Witholding of taxes at source Accreditation of banks to collect taxes Quarterly filing and payment of income tax on business income Administrative feasibility refers to how convenient and efficient it is for taxpayer to pay Collection of taxes proportionate to ability of the tax payer to pay (e.g. Pages to fill in the forms, mode of payment, when and where to file) "Ability of tax payer to pay" is under theoretical justice. 19 The power of tax is the power to destroy. Is this always so? No, the executive branch may decide not to enforce a tax law which it believes to be confiscatory Yes. Tax laws should always be enforced because without taxes the very existence of state is endangered No. The suprememe court may nullify a tax law, hence, property rights are not affected. Yes. Tax collectors should enforce a tax law even if it results in the destruction of the property rights of a taxpayer. 20 Which of the following could not be considered as a purpose of taxation? To distribute the wealth of the nation among the poor. Taxation is for the nation and all of its citizens, not just the poor. To raise revenue for the government. To regulate inflation. To protect local industries from foreign competition. 21 Which statement is false? Non-payment of tax does not make the activity taxed unlawful A tax is a demand of soverignty while a toll is a demand of ownership Customs duty is a tax A grant of police power to a local government unit carries with it a grant of the Police Power regulates rules to promote general welfare, they do not have power to tax. LGU power to tax collects but does not impose tax. 22 One of the following is a distinction between tax and license fee Tax can be assigned while license fee cannot be assigned Tax is normally paid after the commencement of business while license fee is paid before the commencement of the business Tax is not subject to set-off whereas license fee is a subject to set-off Tax is based on law while a license fee is based on contract 23 Which of the following is not an example of excise tax? Real property tax Percentage tax Estate tax Income tax 24 One of the characteristics of a tax is that: It can be subject to set-off or compensation It is generally assignable It is generally based on contract It is generally payable in money 25 Which of the following is not among the basic principles of a sound tax system? Theoretical justice Uniformity Principle Fiscal adequacy Administrative Feasibility XYZ corporation manufactures glass panels and is almost at the point of insolvency. It has no more cash and all it has are unsold glass panels. it received an assessment from the BIR for 26 deficiency in income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels. Should the BIR grant the requested permission? It should grant permission; otherwise, XYZ corporation would not be able to pay It should not grant permission because a tax is generally a pecuniary burden Pecuniary Burden = to pay in the form of money It should grant permission to make payment convenient to taxpayers It should not grant permission because the government does not have the storage facilities for glass panels 27 The following except one, are basic principles of a sound tax system It must be progressive Sources of revenue must be sufficient to meet government expenditures and other public needs It should be capable of being effectively enforced It should be exercised to promote public welfare Police Power Which one of the characteristics of tax justifies that payment of tax is not discretionary on 28 the part of the taxpayer? Discretionary means voluntary or optional. Question is which statement supports that It is an enforced contribution taxation is not optional? It is generally payable in money It is levied on persons or property It is proportionate in character 29 Which of the following is not an example of excise or privilege tax? Income tax Estate tax Real property tax Value added tax It is a tax of fixed proportion of the value of the property with respect to which the tax is 30 assessed and requires intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined is known as Specific Tax Ad valorem Local tax Indirect tax CLWTAXN INDIVIDUAL ASSIGNMENT 1 TRUE OR FALSE NO. QUESTION ANSWER REMARKS To be exempted from income tax, the real property must be actually, directly and 1 TRUE exclusively used for religious, charitable or educational purposes. 2 Under international law, foreign government may not be sued without its consent TRUE All government entities regardless of their functions are exempted from taxes because 3 FALSE Government-owned facilities built for proprietary functions are subject to tax. it would be impractical for the government to be taxing itself. The constitution prohibits the imposition of license fee on the sale of bibles by a 4 TRUE non-stock, non-profit religious corporation. 5 Under the constitution, churches are exempted from income taxes. FALSE Uniformity means all taxable articles or properties of the same class shall be taxed at the 6 TRUE same rate. 7 The executive department determines the respective jurisdictions of lower courts FALSE 8 No person shall be imprisoned for non-payment of income tax. FALSE Poll Tax 9 Collection of taxes in absence of a law is violative of due process clause. TRUE Rentals paid by tenants to local government units are taxable because leasing of 10 TRUE properties is a propriety activity. In case of falsification of community tax certificate, the penalty of imprisonment cannot 12 FALSE be imposed. While the power of tax cannot be delegated to executive agencies, details as to 13 enforcement and administration of an exercise of such power may be left to them, TRUE including the power to determine the existence of facts on which its operation depends. 14 The lifeblood doctrine requires the government to override its obligations and contracts FALSE Non-Impairment Clause Government owned or controlled corporations exercising proprietary functions are 16 TRUE taxable unless expressly exempted by the law. MULTIPLE CHOICE NO. QUESTION REMARKS 11 Which of the following is a constitutional limitation on the power of taxation? Prohibition against imprisonment for non-payment of income tax. Exemption of mosques from property tax Exemption of government agencies from taxation Limitation of territorial jurisdiction 15 Which statement is wrong? A revenue or tax bill May originate in the senate and on which the same bill the house of representative may propose emendments. Must originate in the house of representative and on which the same bill the senate may propose amendments May have a house version and a senate version approved separately and then consolidated, with both houses approving the consolidating version May be recommended by the president to congress The municipality of San Isdiro passed an ordinance imposing a tax on installation 17 managers. At that time, there was only one installation manager in the municipality; thus, only he would be liable for the tax. Is the law constitutional? It is constitutional as it applies to all persons in that class. It is unconstitutional for lack of legal basis It is unconstitutional because it clearly discriminates against this person It is constitutional because the power of tax is the power to destroy 18 All of the following are inherent restrictions on the exercise of taxing power except: Territorial Jurisdiction International Comity Rule of Uniformity For Public purposes 19 In case of a bill granting tax exemption, the voting requirement for its approval is: majority of total members of congress majority of those present, whether or not there is quorum majority of the quorum majority of those present provided there is a quorum 20 Money collected from taxation shall not be paid to any religious dignitary except when It is part of lawmarker's pork barrel The religious dignitary is assigned to Philippine Army It is passed in audit by commission on audit It is paid by a local government unit For consideration received, the government executed a contract granting tax exemption to 21 ABC Corporation. Subsequently, the government revoked that tax exemption by virtue of law. Is the law valid? It is not valid because there is denial of due process It is valid because a law may be revoked, amended or repealed by congress It is not valid because it is violative of equal protection clause The law is not valid because it is against non-impairment of obligation of contracts 22 Which of the following acts can be performed by an administrative body? Determination of the amount to be imposed Fixing the allocation of the amount to be collected between the local and national government Determining the purpose of the tax to impose Levy or distraint of taxpayer's property for tax delinquancy Matalino University, Inc., is a stock educational institution organized for profit, decided to lease out for commercial use a portion of its school. The school actually, directly, and exclusively used 23 the rents for the maintenance of its school buildings, including payment of janitorial services. Is the leased portion subejct to real property tax? Yes, since Matalino University, Inc. is a properietary educational institution Yes, since the leased portion is not actually, directly, and exclusively used for educational purposes No, since the school actually, directly, and exclusively used the rentals for educational purposes No, but it may be subject to income taxation on the rents it receives XYZ Church leased out its parcel of land to ABC University, an educational institution organized 24 for profit, to be used as latter's school site. The church used the rentals for the support and ukeep of its priests. Are the rentals taxable? Yes, because the rentals came from a proprietrary educational institution No, because the rentals are used for religious purposes Yes, because the rentals are income from property and not derived from religious activities No, because XYZ Church is a religious institution To raise funds for the maintenance of elevators, the City Council of Quezon passed an ordinance 25 levying elevator tax on Quezon City residents using the elevators in city hall and other local government offices within quezon city. Which statement is correct? The ordinance is constitutional The ordinance is unconstitutional for violating due process The ordinance is unconstitutional for violating equal protection The ordinance is unconstitutional for violating non-impairment of obligation of contracts The US government invested PHP1 Billion in a Philippine local bank and earned PHP10 million 26 interest. Which is correct? The income is subject to tax on the basis of sovereignty The income is tax-exempt by reason of international comity The income is taxable because it is earned within the Philippines The income is tax-exempt on grounds of territoriality 27 Which is an example of poll tax? Estate tax Community tax Income tax Percentage tax 28 Which of the following is not a constitutional limitation on power to tax? No tax law shall be passed without the concurrence of a majority of all members of the congress. Non-appropriation for religious purposes Non-infringement for religious freedom No law impairing the obligations of contracts shall be passed XYZ Church leased out its parcel of land to ABC University, an educational institution 29 organized for profit, to be used as latter's school site. The church used the rentals for the support and upkeep of its priests. Is the parcel of land taxable? Yes, because the parcel of land is actually, directly, and exclusively used by a stock corporation No, because the rentals are actually, directly, and exclusively used for religious purposes No becuase it is actually, directly, and exclusively used for educational purpose No, because it is actually, directly, and exclusively used used for religious purpose The President vetoed in the tax reform for acceleration and inclusion (TRAIN) bill the provision 30 that exempted taxpayers whose sales or receipts did not exceed from PHP500,000 from 3% percentage tax. Which of the following is correct with respect to the veto made by the president? Other provisions are not affected by the veto Veto is void as it can only be exrcised by congress The President cannot reject the bill passed by congress All provisions are in effect rejected by the President Congress passed a law subjecting government owned and controlled corporations (GOCCs) to 31 income tax. Is the law valid? Yes, because GOCCs are essentially commercial in nature No, because GOCCs are constitutionally exempted from paying taxes Yes, because all government agencies and instrumentalities are subject to tax No, because all government agencies are tax-exempt Proprietary educational instritutions are subject to 10% income tax. The rate becomes 20%/25% 32 if the gross income from unrelated activities exceeds 25% of the gross income of the school 50% of the gross income of the school 75% of the gross income of the school 10% of the gross income of the school